No one actually knows what the consequences of this are for global capital markets. At first glance, a shrinking population should put pressure on government deficits as there are fewer young people contributing tax receipts to finance entitlements for the elderly. For developed countries, there is ample supply of young people from developing countries willing to migrate in order to improve their standard of living, which could act as an offset. For developing countries with populations projected to shrink, the situation is more challenging.

Aging populations also have an unclear impact on inflation. One would expect that retirement should be inflationary. Supply is removed from the economy as people stop working, while demand continues as retirees continue to spend (albeit at a reduced rate). However, the empirical experience of Japan and Western Europe is the opposite. Both appeared to be mired in deflation prior to 2021.

Ageing populations will weigh on overall economic growth (due to lower labour supply growth) and also due to lower productivity growth. Individuals experience the most uplift in their labour productivity in their 20s and 30s. With these cohorts a lower proportion of the overall population, compositionally, productivity growth should be lower going forward. Lower economic growth generally means weaker equity market returns. In addition, to the extent that retirees sell accumulated assets to fund their lifestyle, the price of assets should fall. However, there could also be an aggregate switch away from growth assets towards defensive assets as retirees de-risk their portfolios.

‍

Artificial Intelligence

The only real shining light on the thematic horizon is the potential positive benefits from artificial intelligence (AI). We first wrote about the potential impact of AI in early 2023, shortly following the wide release of Chat GPT. Since then, models have improved significantly, and commercial adoption of AI tools has accelerated. We think there is a very good chance that this widespread adoption leads to an increase in productivity growth of a similar magnitude to that seen during the adoption of personal computers in the 1990s. This could be somewhere in the order of 1.5 percentage points higher productivity growth per annum in developed markets, which would nearly double potential economic growth in developed economies. This should deliver robust equity market returns. Note that this is alongside the already stellar returns that have been delivered by AI beneficiary stocks. Market returns should broaden as most corporates would benefit from enhanced productivity. To the extent that AI models continue to improve in the decade ahead with better input data and more processing power, the impact could be even greater.

Some Scenarios for the Future

The themes above are useful in framing the scenarios used in the development of our capital market assumptions. This year, we are modelling four distinct scenarios (outlined below).